Uber (NYSE:UBER) was the original unicorn that popularized the term. But in 2019 unicorns almost became extinct because investors revolted against them. Some, like WeWork, never recovered. But Uber stock did. However, the stock is still depressed almost 40% below its highs.
Regardless, I’m still bullish on the stock and I think it’s one to own for the long term.
The last time I wrote about it was back in February after a brief rally. Back then, I noted that it was “headed into a resistance zone. And since markets are near all-time highs we could see a small correction, especially while we are still dealing with the the coronavirus from China.” Those comments proved true as the Uber stock fell about 65% soon thereafter.
I knew there was potential trouble, but little did we know that we were headed into a complete global shutdown. Buying that dip was the right thing to do and that’s the concept I am conveying today.
We can’t always pick the perfect time to trade but over the long haul, averaging into a quality opportunity like this makes sense.
The Bullish Thesis on UBER Stock
Let’s get it out of the way that Lyft (NASDAQ:LYFT) is not a proper equivalent. Uber’s goal is to become the parent of many verticals, much like Amazon (NASDAQ:AMZN) has done. The goal is to aggregate dozens of businesses and feed the cash cows. It is also important to cut loose ones where they lag the competition like they did with its Eats division in India. Management has earned the respect of Wall Street again after some scary moments last year. This is important because investors will now buy the stock on dips knowing that their money is in good hands.
CEO Dara Khosrowshahi has been consistent with his message that they’re in it for the long term. But the important part is that he no longer says at all cost. Uber finally put investor’s minds at ease, after acknowledging the need to be somewhat frugal. Uber are not spending fools anymore.
The Driver Debate Is a Non-Issue
There are still some lingering issues from an old scab that involves the workforce. Recently Uber stock has seen some selling pressure from the headlines that are coming out of California. The labor dispute from their ride sharing program is coming to a head. Both Uber and Lyft are taking the fight to the state by threatening to exclude it from their service while the squabble continues.
This will not be a popular decision for politicians there because it will impact the income of roughly 220,000 drivers. Not to mention the loss of the convenience of their ride services. In the end I am confident that they will resolve this issue. This is a bigger problem for Lyft, because Uber is global and has about a dozen other verticals already.
Valuation still matters and Uber stock is definitely expensive. It still loses money, but the good news is that its price-to-sales ratio is only 2.6x. This is two times cheaper than Amazon and three times cheaper than Apple (NASDAQ:AAPL). The price-to-sales indicates how much hopium is baked into the current stock price. For Uber it is under three years, compare that to Zoom (NASDAQ:ZM) which is 108 years. Clearly buyers of Uber stock are very realistic about their expectations of future sales growth.
There Are Levels to Trade for the Next Few Months
The bulls showed gumption recently, but the rally failed at $35 per share. This resulted in a 20% dip, but the good news is that they have support near $28. Holding true to the theme of this article, this is a buy-the-dip opportunity for those who want to accumulate the position over time. But if the support fails there could be another $4 drop. While this is not my forecast, it is a scenario that exists.
Moreover, there is extrinsic risk from the stock market in general. The S&P 500 just set a new record high yesterday, and this is rarely an obvious place to start new bullish positions. To be safe, it would be smarter to take positions in tranches and not all at once. This leaves room to manage the risk if UBER stock price continues to fall.
Get Long While Leaving Room for Error
Using options, investors can get long the stock and build a buffer to provide some room for error. Traders can sell the November $26 put and collect almost $2 for it. This trade does not need a rally to profit and it won’t lose money until the price falls to $24 per share.
Regardless of the method, the thesis is the same. Uber is a long-term winner for as long as they continue executing well on plans. This is a highly technical world we are developing and Uber is likely to be part of its many verticals. For example, the transportation sector is hotter than it has been in a while, so Uber freight should benefit from that trend. Stocks like FedEx (NYSE:FDX) and United Parcel Servoce (NYSE:UPS) have come out of the penalty box to shine again and Uber will gain from their resurgence.
With a competent management team, Uber can continue winning but it will require patience. Investors must ignore the bearish pundits who continue to judge it as a taxi service because they are missing the whole point. Remember that this team was able to avoid a disaster, even when the whole world stopped moving for months. That alone is an incredible feat.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
